FSSA’s investment philosophy key to resilience
FSSA Investment Managers (FSSA), an autonomous investment team within First Sentier Investors (previously known as First State Investments), has been recognised with multiple awards in this year’s Asia Asset Management (AAM) Best of the Best Awards. The firm received a performance award for Global Listed Infrastructure (10 years), country awards for Best ESG Engagement (Hong Kong) and Best House for Alternatives (Singapore), as well Best ESG Manager in ASEAN. FSSA was also recognised regionally with a merit award in the category of Most Resilient Fund.
Speaking to AAM, portfolio manager of FSSA’s Japan Equity Strategy, Sophia Li, gave her views on the current state of the Japan equity market and the effect of the ongoing global pandemic.
“Given the sluggish economic growth and anaemic inflation after multi-decades of zero interest rate policy, individual stock performance is solely linked to the company fundamentals and decouples from the Japan equity market,” she says. “As bottom-up stock pickers we simply invest in a small group of best ideas in Japan which can generate sustainable cash flow growth relatively independent of the macro environment without leveraging.”
FSSA’s investment philosophy has always been about identifying quality companies, buying them at sensible prices and holding for the long term. This hasn’t changed even during the global pandemic.
“Growth outlook of most of the companies in our strategy has improved meaningfully in the past 12 months. The fundamentals of the companies we invest in are very resilient and have controlled costs well. Some of them took the opportunity to restructure their non-performing businesses during the pandemic and we believe that their return on investment will turn out to be stronger post pandemic.”
“In the early days of the pandemic we started to identify companies that might benefit from the acceleration of secular investment trends. The 2011 Tōhoku earthquake taught us that significant external events can change consumer behavior – even against the backdrop of Japan’s conservative society norms. The longer such catastrophes continue, the more structurally embedded the new behavior becomes. This led us to the principal businesses in the digital payments, e-commerce and Software-as-a-Service (SaaS) industries, as well as affordable private-label retailers that tapped into consumers’ cost-consciousness. Interestingly, we already owned many of these types of companies, and we took the opportunity to add to them at lower prices amid the market sell-off earlier in the year. We firmly believe that this, along with a strong management team, is what protects capital during a downturn. In our view, quality is what drives returns in the long run, rather than relative valuation metrics.”
According to Sophia, the key factor that has contributed to the strategy’s resilience is an investment philosophy based on investing in companies that have strong franchise and management, and those which can deliver ROIC and sustainable growth of long-duration.
In terms of franchise, she notes that the strategy mainly invests in companies with dominant market share in niche industries and adopt a very focused strategy to build up the economic moat, leading to strong pricing power and high return on investment. The investment team also prefers an asset light business model, which Sophia says is a key factor behind high ROIC and earning resilience during the economic down cycle.
“We only invest in companies with a strong ability to innovate, and believe that the ultimate source of a company’s long-lasting competitive advantage is the quality of people and corporate culture. We also seek to invest in companies that are either positioned in industries with secular growth drivers, or companies that can take market share from incumbents by launching innovative business models and products,” she adds.
As bottom-up stock investors Sophia and her team do not take a short-term view of the market. The strategy’s portfolio, she says, is built company by company, with little regard for index positioning.
To conclude: “We will continue to search for high quality companies that are in charge of their own destiny.”
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